The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

April 7, 2022









http://www.brokeandbroker.com/6384/merrill-lynch-cma/
Perhaps the last thing that Plaintiff in a federal lawsuit wants to hear from the judge is "I don't care." In a recent bit of federal litigation, the public customer Plaintiff sort of got that response twice. Once, the Court didn't care if the customer did or didn't sign certain new account agreements. Second, the Court didn't care if the customer had intended to sign or not sign the agreements. Sometimes you sort of get the feeling that your case ain't going well.

In a FINRA Arbitration Statement of Claim filed in September 2019 and as amended, public customer Claimants asserted breaches of contract, of the implied covenant of good faith and fair dealing, and of fiduciary duty; manipulation, negligence, elder abuse, conversion, unjust enrichment, and omission of facts. Claimants sought compensatory, treble, double, punitive, and exemplary damages plus costs and fees. Respondent Interactive Brokers generally denied the allegations, asserted affirmative defenses, and filed a Counterclaim seeking $26,771,816 in compensatory damages and alleging common law fraud; conspiracy to commit fraud; aiding and abetting fraud; federal securities fraud; and breach of contract. The FINRA Arbitration Award alleges that the "causes of action relate to Yangtze River Port and Logistics Limited stock."

Clearly this was a hotly contested arbitration. In part, the FINRA Arbitration Award states that:

On January 14, 2021, Respondent filed a Motion for Sanctions for Claimants' failure to comply with the Panel's discovery order of December 16, 2020 ("December 16 Discovery Order"). On January 22, 2021, Claimants filed their opposition to the motion. On January 27, 2021, Respondent filed its reply in support of the motion. On February 18, 2021, the Panel heard oral arguments on the Motion for Sanctions. On March 4, 2021, the Panel issued an order ("March 4, 2021 Order"), stating in relevant part: 
. . .

3. Respondent's January 14, 2021 Motion for Sanctions is GRANTED in part, with the Panel reserving such part of its ruling as is set forth in paragraph 6, below. 

4. Pursuant to FINRA Rule 12212(a) Claimants, by and through their attorneys of record, shall pay to Respondent the sum of five thousand and no/100 dollars ($5,000.00) within ten (10) days of the date of service of this Order. One such payment shall be made on behalf of all Claimants collectively. Claimants shall certify payment of such amount by concurrent notice to the FINRA case administrator. 

5. Claimants shall produce within fourteen (14) days of the date of this Order (a) all documents (i) held by Claimants in their personal capacity or (ii) by businesses owned or controlled by Claimants, during the Relevant Time Period as called for by the December 16 Discovery Order, or (b) further declarations from each Claimant under penalty of perjury expressly stating that no documents in either category (a)(i) or (a)(ii) exist other than those already produced to Respondent. 

6. The Panel hereby warns Claimants and their counsel pursuant to FINRA Rules 12212(c) and 12511(b) that if it appears at any time during the course of these proceedings, through and including the evidentiary hearing herein, that Claimants have failed fully to comply with the December 16 Discovery Order in all respects, the Panel reserves the right to impose further sanctions pursuant to FINRA Rules 12212(a), 12212(c) and/or 12511(b), up to and including (a) precluding Claimants from presenting evidence, (b) making one or more adverse inferences against Claimants and/or (c) dismissal of Claimants' Claims and/or defenses herein. 
... 

During the course of the evidentiary hearing, the Panel noted that Claimants had failed to produce documents subject to the December 16 Discovery Order or otherwise comply with the terms of the March 4, 2021 Order. Respondent thereupon brought a motion for terminating sanctions or other relief pursuant to the March 4, 2021 Order. After considering Respondent's motion and Claimants' response, the Panel issued an Order imposing further sanctions in the nature of an adverse inference such that the burden of proof was shifted to Claimants to disprove their participation in a stock-manipulation conspiracy as alleged in Respondent's counterclaim. At the close of Claimants' case, Respondent renewed its motion for terminating sanctions, in the nature of a motion to dismiss or for a directed verdict. After considering Claimants' opposition, the Panel denied Respondent's motion.

The FINRA Arbitration Panel denied Claimants' claims but found them jointly and severally liable to Respondent Interactive Brokers, and ordered Claimants to pay $26,771,816 in compensatory damages.

Monmouth County Man Admits Orchestrating Multimillion-Dollar Accounts Receivable Factoring Scheme (DOJ Release)
https://www.justice.gov/usao-nj/pr/monmouth-county-man-admits-orchestrating-multimillion-dollar-accounts-receivable
Vincent Galano, 59, pled guilty to one count of wire fraud per an Information filed in the United States District Court for the District of New Jersey
https://www.justice.gov/usao-nj/press-release/file/1492596/download. As alleged in part in the DOJ Release:

Accounts receivable factoring (factoring), also known as invoice financing, is a financial transaction through which a company obtains cash by selling its unpaid invoices, ordinarily at a discount, to a factor. Factoring clients send their debtors notices of assignment naming the factor as the assignee of the debt owed on the invoices. The factor, in turn, collects invoiced amounts owed by the clients' debtors and, upon collection of the entire invoiced amount, pays its clients the balance of the invoice, deducting the factor's fees.

Galano formed Prime Financial Funding LLC (PF Funding) in 1996 for the purpose of factoring accounts receivables for various corporate clients. In 2007, PF Funding entered into a secured lending relationship with a single-purpose entity created to finance PF Funding's factoring business.  Shortly thereafter, the factoring lender established a line of credit as a means to provide PF Funding capital to grow its receivables portfolio. Over the next several years, PF Funding grew its factoring business by drawing from the line of credit while maintaining as current its loan obligations to the factoring lender. However, beginning in 2011, Galano, through PF Funding, purchased increasingly greater numbers of invoices for which he was unable to collect the debt owed on the receivables. To justify PF Funding's continued draws from the line of credit, Galano concealed this bad debt from the factoring lender by misrepresenting the bad invoices as collectible on reports he routinely provided to the factoring lender. In other instances, Galano mischaracterized invoices that had already been paid and collected as outstanding and capable of being factored, in essence double-counting to drive up the outstanding receivables. In the reports provided to the factoring lender, Galano manipulated the overall value of PF Funding's portfolio of outstanding invoices in an amount proportional to the funds he needed to draw from the unsecured line of credit to maintain as current the principal and interest payments on his outstanding loans.   

Engaging in this pattern of misrepresentation over nearly a decade, by 2020 PF Funding had ultimately defaulted under its loan obligations, owing approximately $50 million to its lenders by virtue of the scheme. During a May 2020 telephone call with his lenders, Galano admitted that he had concealed significant losses suffered by PF Funding over many years. He further admitted that he had routinely distributed to lenders over that prolonged period fabricated reports that overstated the number and value of outstanding invoices which the reports represented as payable.   

https://www.justice.gov/usao-nj/pr/colorado-ceo-and-fund-manager-admits-11-million-securities-fraud-scheme
Samuel J. Mancini, 55, plead guilty to one count of securities fraud per an Information filed in the United States District Court for the District of New Jersey. As alleged in part in the DOJ Release:

Mancini managed and controlled Outdoor Capital Partners LLC (OCP), which he purported to be a venture capital and private equity firm. OCP served as the managing director of OCP Italia Fund LLC (OCP Italia), a private investment fund. Mancini used OCP and OCP Italia to engage in the fraudulent scheme.

From February 2020 through July 2021, Mancini promised investors that he was raising $20 million, including $5 million of his own money, for OCP Italia to invest solely in acquiring controlling interests in three Italian cycling companies. Mancini represented to investors that the acquisitions would take place soon after the fund closed. To induce investments, Mancini promised investors approximately 70 percent of OCP Italia's operating profits. 

Mancini repeatedly misrepresented his finances and his contribution to OCP Italia.  Mancini also misrepresented OCP Italia's ability to close on the acquisitions. OCP Italia never acquired any of the Italian cycling companies. Instead, Mancini defaulted on contracts, diverted investor funds out of OCP Italia, and, in certain instances, paid investor funds to other investors seeking redemption.

 Mancini also misled investors about his educational background by representing himself as a graduate of a prestigious military academy when, in fact, Mancini had failed to graduate from the academy due to an ethical violation. 

When confronted with requests for transparency and redemptions by certain investors in OCP Italia, Mancini failed to honor the redemption requests, made misrepresentations about his inability to honor the redemption requests, misstated and omitted material facts, and provided certain investors with forged, modified, or otherwise fraudulent documentation and financial records. Mancini fraudulently obtained approximately $11 million from victims. 

https://www.cftc.gov/PressRoom/PressReleases/8510-22
The United States District Court for the Middle District of Florida entered an Order
https://www.cftc.gov/media/7121/enffintechorder032422/download for permanent injunction, monetary sanctions, and equitable relief against Alan Friedland and his companies, Fintech Investment Group, Inc. and Compcoin LLC. The Order requires the Defendants to pay $1,200,000 in restitution and a $600,000 civil monetary penalty; and, further imposes a permanent ban on Friedland, Compcoin LLC, and Fintech from soliciting or trading in commodity interests or registering with the CFTC in any capacity. As alleged in part in the CFTC Release:

[F]rom approximately 2016 through 2018, Friedland and his companies fraudulently solicited customers and prospective customers to purchase a digital asset known as Compcoin. The defendants falsely promised, among other things, that Compcoin would allow customers to gain access to what they described as Fintech's proprietary forex algorithmic trading program known as ART.

In solicitation materials, the defendants represented, among other things, that the ART trading algorithm was "complete in form and function," and "ready for release on the open market." The defendants also represented that "ART's high success rate at predicting . . . forex trades, coupled with the high rate of return from these trades, will stimulate demand among investors and forex traders to purchase and use Compcoin-specifically to gain access to ART." 

As reflected in the order, the defendants knew that customers could not lawfully use ART until Fintech received approval of its disclosure documents from the National Futures Association (NFA). Nonetheless, the defendants offered Compcoin prior to Fintech seeking NFA approval of its disclosure documents. Although the defendants touted the successful performance of ART, they knew that its performance, which was referenced in solicitations, was based largely or entirely on hypothetical performance results and not real trading. The defendants also knew the Compcoin LLC website and solicitations did not contain the required disclaimer for simulated or hypothetical performance. Ultimately, the NFA did not approve Fintech's risk disclosure statements, and purchasers of Compcoin never gained access to the supposedly highly profitable forex trading algorithm as promised. Instead, purchasers of Compcoin were left with a worthless digital asset. 

https://www.finra.org/sites/default/files/fda_documents/2020065274801
%20Jay%20S.%20Sheth%20CRD%204656009%20AWC%20lp.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Jay S. Sheth submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Jay S. Sheth was first registered in 2003, and by January 2004, he was registered with National Securities Corporation. In accordance with the terms of the AWC, FINRA imposed upon Sheth a $20,000 fine and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in the "Overview" portion of the AWC:

Between April 2019 and November 2019, while associated with National, Sheth made 21 payments to 11 firm customers totaling $71,581 in order to compensate them for losses associated with investments that Sheth had recommended. By making these payments, which were not authorized by National, Sheth shared in his customers· losses in violation of FINRA Rules 2150(c) and 2010. 

In May 2019, Sheth engaged in three private securities transactions (PSTs) totaling $171,000 without providing prior written notice to, and receiving approval from, National, in violation of FINRA Rules 3280 and 20 I 0. 

Since at least 2013, Sheth communicated with National customers regarding securities-related business through unapproved channels including text messaging and the instant messenger application WhatsApp. Theses communications related to National's business but were not preserved as required by Section l 7(a) of the Securities Exchange Act of 1934 (the Exchange Act) and Rulc 17a-4(b)(4) thereunder. By causing National to maintain incomplete books and records, Sheth violated FINRA Rules 4511 and 2010. 
(BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/6385/sec-whitewash/
When the opening sentence of any governmental report informs you that some bureaucracy has "identified a control deficiency," you know that what follows will require cases of toilet paper and gallons of deodorizer. Frankly -- sadly --  a recent SEC Statement is little more than a generic, non-specific bit of whitewash that stains the federal regulator's reputation. At issue is the improper access by the SEC's Enforcement staff of the SEC's Adjudication database. One is supposed to be walled off from the other. Think of it as if a federal prosecutor had the password to the database of the federal judge hearing a criminal case -- but the defense didn't. The SEC didn't rush to promptly inform the public about what looks like a breach of its confidential files by its own staff. Yet again, we have a government acting one way while insisting that we act another.

http://www.brokeandbroker.com/6376/finra-fife-sdny/
In that old Dr. John tune, he sings that "I been in the right place, but it must have been the wrong time." You're right, they just don't write 'em like that anymore! In a recent federal lawsuit against Wall Street's self-regulatory-organization FINRA, we have a Plaintiff who seems to have sued in the wrong court at the wrong time -- not exactly parroting the lines of the song but sort of capturing the spirit. 

http://www.brokeandbroker.com/6364/form-u5-privilege/
On Wall Street, there are rules and regulations requiring that a former employer truthfully disclose certain aspects of the firing of a former employee. That disclosure regimen is supposed to ensure that investor protection concerns are addressed by alerting the regulators to any troublesome aspect of the former employee's conduct that prompted the termination. Some think it is a healthy approach to encourage former employers to send up flares and ring alarms, even if it turns out that some of the initial concerns weren't warranted. Others think it's a terrible idea that weaponizes the termination process in a manner designed to hamstring former employees and hobble their abilities to retain their customers or subsequently compete with their former employer. In a recent federal lawsuit, a lot of the pros and cons of Wall Street's termination protocol are on full display. 

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